Skip to content

Taxation (UK) · The computation of VAT liabilities

VAT Fraction 1/6 and Prompt Payment Discounts in TX-UK

Updated 11 October 2026 · Fact-checked

VAT is charged on the value of the supply. At the 20% standard rate, VAT on a VAT-exclusive price is 20% of it. On a VAT-inclusive price it is 1/6 of the total. For a prompt payment discount, charge VAT on the discounted price, whether or not the customer takes the discount.

Understand Value of Supplies, Discounts and Mixed Supplies

VAT is a tax on the value of a supply. Output tax is charged on sales. The question is always: what is the value on which VAT is charged? You must know whether a figure is VAT-exclusive (net) or VAT-inclusive (gross).

At the standard rate of 20%, a net price of 100 becomes 120 gross. VAT is 20 on the net figure. But 20 is 1/6 of the gross 120. That is where the VAT fraction of 1/6 comes from: 20 ÷ 120 = 1/6. Use 20% when you start from net. Use 1/6 when you start from gross.

A prompt payment discount is a discount offered if the customer pays within a stated period. The VAT rule is that VAT is charged on the discounted price, whether or not the customer actually takes the discount. If the customer pays late, the supplier still accounts for VAT on the discounted amount. The VAT invoice must show the discount terms.

A trade discount is simply a reduction in the price. VAT is charged on the reduced price actually charged.

A mixed supply is a single transaction containing items with different VAT treatments, for example standard-rated and zero-rated goods sold for one price. In the exam, you will normally be told the split of values, or told which items are standard-rated. Apply the right rate to each part. Only the standard-rated part carries VAT at 20%.

Key rules to remember

VAT on a VAT-exclusive price
VAT = net price × 20%
The standard rate is 20%. Gross price = net × 1.20.
VAT on a VAT-inclusive price
VAT = gross price × 1/6
Valid at 20% only. Net price = gross × 5/6, or gross ÷ 1.20.
Prompt payment discount
VAT = (price after discount) × 20%
Use the discounted price whether or not the customer takes the discount.
Registration and deregistration limits
Registration £90,000; deregistration £88,000
These are given in the tax rates and allowances provided in the exam.

How to solve Value of Supplies, Discounts and Mixed Supplies questions

Use this method for any question on the value of supplies, discounts or mixed supplies.

  1. 1Identify each supply and whether it is standard-rated, zero-rated or exempt. Only standard-rated supplies carry 20% VAT.
  2. 2Check whether each stated price is VAT-exclusive or VAT-inclusive. Look for wording such as 'plus VAT' or 'including VAT'.
  3. 3Deduct any trade discount first to get the price actually charged.
  4. 4Apply any prompt payment discount to find the discounted price. This is the value for VAT, even if the customer pays late.
  5. 5Calculate VAT: net × 20%, or gross × 1/6.
  6. 6Show the net value, the VAT and the gross total clearly. Round to the nearest £ as the exam instructs.
  7. 7For a mixed supply, split the total into its parts, apply the correct rate to each part, and then add the VAT.

Quickest way: Net 100, gross 120, VAT 20

When to use it: Use it when a question gives a VAT-inclusive total and asks for the VAT or the net sales value.

  1. Think of the ratio 100 : 20 : 120, or 5 : 1 : 6.
  2. From gross, divide by 6 to get the VAT. Multiply that by 5 to get net.
  3. From net, divide by 5 to get the VAT. Multiply by 6 to get gross.
  4. For a prompt payment discount, take the discount off the net price first, then use the ratio.

Common mistakes in Value of Supplies, Discounts and Mixed Supplies

  • Calculating VAT on a VAT-inclusive price as 20% of the gross figure.

    Students see 20% and apply it automatically.

    Fix: If the price includes VAT, use gross × 1/6. Check by confirming that net + VAT equals gross.

  • Using 1/5 instead of 1/6 on a gross figure.

    1/5 is the same 20% rate, but it only works on the net figure.

    Fix: Write 'gross' or 'net' beside each number before choosing the fraction.

  • Charging VAT on the full price when a prompt payment discount is offered.

    Students wait to see whether the customer pays early.

    Fix: VAT is on the discounted price in every case. The customer's actual behaviour does not change it.

  • Applying the prompt payment discount to the VAT-inclusive price.

    The question gives only a gross figure and the student rushes.

    Fix: Convert to net, apply the discount, then calculate VAT on the discounted net price.

  • Charging VAT on the whole of a mixed supply.

    The student ignores the zero-rated or exempt part.

    Fix: Split the value by item and apply the correct VAT treatment to each part. Add VAT only to the standard-rated part.

Worked examples

Example 1

A VAT-registered trader sells goods for £14,400 including VAT at the standard rate. Find the VAT charged and the VAT-exclusive value.

Show the solution
  1. The price is VAT-inclusive, so use the VAT fraction of 1/6.
  2. VAT = £14,400 × 1/6 = £2,400.
  3. Net value = £14,400 − £2,400 = £12,000.
  4. Check: £12,000 × 20% = £2,400. This agrees.

Answer: VAT is £2,400 and the VAT-exclusive value is £12,000.

Example 2

A VAT-registered business sells standard-rated goods with a list price of £8,000 plus VAT. It offers a 5% discount if the customer pays within 14 days. The customer pays after 30 days. Calculate the VAT payable on the sale and the total the customer paid, assuming the full list price was paid.

Show the solution
  1. The discount is a prompt payment discount. VAT is charged on the discounted price whether or not the customer takes it.
  2. Discounted net price = £8,000 × 95% = £7,600.
  3. VAT = £7,600 × 20% = £1,520.
  4. The business accounts for output VAT of £1,520, even though the customer paid late.
  5. The customer paid late, so it pays the full £8,000 net price plus £1,520 VAT = £9,520.

Answer: Output VAT is £1,520, calculated on £7,600. The customer paid £9,520 in total.

Exam tips

  • Mark every figure as net or gross before you calculate. Most lost marks come from using the wrong base.
  • Remember that the VAT fraction of 1/6 applies only at the 20% standard rate.
  • For prompt payment discounts, always calculate VAT on the discounted price, even if the question says the customer paid late.
  • In objective questions, work out the VAT and total quickly with the 5 : 1 : 6 ratio, and check that your answer is one of the four options.
  • In Section C, show your workings, as the instructions require. Round to the nearest £.

Practice questions from The computation of VAT liabilities

Value of Supplies, Discounts and Mixed Supplies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Value of Supplies, Discounts and Mixed Supplies: frequently asked questions

Why is the VAT fraction 1/6 and not 1/5?

At 20%, a net price of 100 gives VAT of 20 and a gross price of 120. VAT is 20 out of 120, which is 1/6 of the gross figure. 1/5 is only correct as a fraction of the net figure.

How is VAT treated on a prompt payment discount?

VAT is charged on the discounted price. This applies whether or not the customer takes up the discount. The supplier does not adjust the VAT if the customer pays late.

What is a mixed supply in VAT?

A mixed supply is a transaction that includes items with different VAT treatments, for example standard-rated and zero-rated items. You apply the correct rate to each part. Only the standard-rated part carries 20% VAT.

Will I be given the VAT rate in the exam?

Yes. The standard rate of 20% and the registration and deregistration limits are included in the tax rates and allowances provided. You must still remember the VAT fraction and how to use it.